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UK hotel investment tops long-term average

Investment into the UK hotel market totalled £3.1bn in the first nine months of the year, according to new research from Savills.

Despite uncertainty around the EU referendum, there remains continued investor interest and resilience in the sector, the international property advisor’s latest UK Hotel Investment report shows.

Deal count, on a rolling monthly basis, as of June was on par with that seen at the corresponding point last year at 113 and far outperformed the 10 year average of 60.

The research highlights that stock constraints in London and wider economic uncertainty has led to investment decisions being determined by income security rather than geography alone, providing a boost to transaction activity in the UK regions. 

In August, a traditionally quiet month, Savills confirms that 14 regional deals were completed compared to five in July including Imperial Hotel in Torquay for more than £10m to the Brownswood  Hotel Group and Kenwood Hall in Sheffield for £6.5m.

For the first time in five years, overseas investors no longer dominate acquisition activity with UK property companies taking the lion’s share, accounting for 34.6%, or £1bn, of total transactions, led by the £550m acquisition of the Atlas portfolio by London & Regional.

This trend is expected to continue as the weaker pound in the latter half of the year restricts UK property companies from investing overseas. Private individuals have also become more active over the course of 2016, with transaction volumes almost double that of year end 2015 levels at £340m.

Overseas investors accounted for 26.3%, or £804m, of transactions in the first nine months of the year, placing them second in volume terms, according to Savills. 

Following the vote to leave the EU, currency fluctuations have enticed overseas investors back due to the ‘value’ offer provided by the weaker pound with Q3 transaction volumes by this group totalling £268m, according to Savills.  

Marie Hickey, commercial research director at Savills, said: “Although we have experienced some softening in investor confidence in the UK hotels market in the wake of the EU referendum, this has not been to the detriment of the regional market.  We are not seeing a retrenchment to London that we may have seen previously when faced with uncertainty.  Rather the focus is increasingly on income security and those markets and assets that offer that, with our analysis suggesting regional towns such as Oxford, Bristol and Winchester offer the most robust operational fundamentals going forward.”

In terms of operating structures, leased deals account for the largest proportion of transactions in the first nine months of the year with Savills noting that the biggest buyers of leased assets remain institutional funds. To date, acquisition volumes of this group total £328m.

While appetite remains, there is significant stock constraint leading to some funds looking beyond traditional budget hotels that have historically dominated institutional activity. In May, Schroders Real Estate Fund acquired Staycity Hayes, a leased serviced apartment property, for £32.4m.

Martin Rogers, head of UK hotel transactions at Savills, commented: “It’s really been a case of two halves this year – pre and post the EU referendum vote – that has shaped the type of investor interested in the sector. Supply constraints and the strong pound affected the decisions of foreign investors over the first six months of the year meaning UK property companies are, to date, the most active in the market. As seen over the third quarter, in the coming fourth quarter we expect to see overseas investors make a comeback with them becoming increasingly more comfortable looking beyond London.”

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